The Carter Co.'s return equity (ROE) is 18%.?

Question

If sales were $4 million the debt ratio was 40% and total liabilities were $2 million, what would be Carter's return on assets (ROA)?

Answer 1

there are different ways to define debt ratio.  some people call total liabilities 'total debt'.   the definition i used was Total Debt divided by Total Capital.   Total Capital = total debt plus total equity.

I got 10.8%

using simple algebra, a debt ratio of 40% gives an equity value of $3million.  

so backing into net income, it's   x/$3M = 18%.  x = net income = $540,000.  

so $540,000 / $5,000,000 = 10.8%